In-specie transfer of shares into superannuation – a strategy analysis

By Michael Forer

Now that shares are available on Pursuit Select, it is a good time to analyse the strategy of in-specie transferring shares into superannuation.

Why in-specie shares to super?

Tax benefits

The benefits of owning assets within superannuation are significant and extremely appealing particularly once a member moves into pension phase. The table below shows the ongoing tax benefits provided by superannuation:

Non Super

Super Accumulation

Super Pension

Maximum tax on earnings

45% plus Medicare

15%

0%

Maximum CGT (assets held less than 12 months)

45% plus Medicare

15%

0%

Maximum CGT (assets held more than 12 months)

22.5% plus Medicare

10%

0%

Centrelink benefits

Prior to reaching pension age, superannuation accumulation funds are exempt from the Centrelink asset and income tests. Therefore, an in-specie transfer of direct shares from an individual’s name into a superannuation accumulation account may result in additional Centrelink entitlements for your clients.

Generally the greatest benefit is achieved where a member is of age pension age but their spouse is not. The superannuation accumulation account of the non-age pension recipient will be excluded from the asset and income test potentially resulting in a greater age pension entitlement for the age pension recipient.

Therefore, consideration should be given to in-specie transferring any direct shares into the superannuation account of the younger member of a couple. In general, the greater the age discrepancy the greater the benefit there is in transferring the shares into the younger member’s superannuation account.

Administration simplification

Owning shares in an individual’s name can be an administration nightmare and prove to be costly and timely to your clients. Accounting for dividends in annual tax returns, maintaining a CGT register (especially for dividend reinvestment plans) and keeping up-to-date on shareholding balances is not for everybody.

By in-specie transferring shares into an existing superannuation fund, clients can consolidate their investment holdings and simplify their ongoing administrative and tax responsibilities.

Beat future contribution caps

Prior to ‘Simple Super’ there was no limit on how much could be contributed into superannuation. Certainly, RBLs often reduced the incentive of contributing too much but no contribution caps existed.

Then in 2007 contribution caps were introduced restricting the amount of money that could be contributed into superannuation before excess contributions tax would apply. These caps were tightened even further this year with the scheduled indexation increases for both concessional and non concessional contributions being scrapped and concessional contribution caps being halved on top of that.

The introduction and subsequent tightening of contribution cap limits means that the strategy of building wealth outside of superannuation and contributing it all into superannuation upon retirement may no longer be achievable.

To avoid the future problem of being unable to contribute funds into superannuation and being left with investments outside the tax effective environment of superannuation it makes sense to consider an in-specie transfer of shares now whilst share prices are still relatively low.

Issues to consider

Capital Gains Tax

An in-specie transfer of shares from an individual to a superannuation fund is a CGT event. Realising a CGT liability will undoubtedly be a consideration when determining whether an in-specie transfer of shares into superannuation is appropriate.

Whilst it may never be a good time to pay tax, there are two points to consider:

1. CGT is unavoidable and the longer an asset is held and the more it appreciates, the greater the CGT liability will eventually be. Even if an investor never sells an asset, the beneficiary of the client’s estate will inherit the CGT cost base and subsequent CGT liability when the asset is eventually sold. Therefore, realising a CGT liability now by in-specie transferring shares into superannuation is in many cases bringing forward the inevitable.

2. Despite a welcome bounce in the global share market since March, the Australian share market is still approximately 35% off its highs. As a result many shares held in individual names are either in a loss position or the unrealised gain has been significantly reduced. Therefore, an in-specie transfer of shares into superannuation at this time will result in a much lower CGT liability than would have occurred if the transfer had been actioned before the start of this bear market. Similarly, by delaying an in-specie transfer, if the share market continues to recover, CGT liabilities will also increase.

Some clients will be able to offset any CGT liability by claiming a tax deduction on the in-specie contribution if they qualify to make personal concessional super contributions.

The ATO’s stance on ‘wash sale’ arrangements

The Commissioner of Taxation has released various alerts and rulings on ‘wash sale’ sale arrangements, including Taxation Ruling TR 2008/1, and Taxpayer Alert TA 2008/7. In particular, the Commissioner has looked at the issue of whether Part IVA may apply to a “wash sale” arrangement.

A wash sale arrangement is where a taxpayer disposes of, or otherwise deals with a CGT asset to generate a capital or revenue loss, but where in substance, there is no significant change in the taxpayer's economic exposure in the asset.

Part IVA is a general tax anti-avoidance provision that gives the Commissioner the discretion to cancel all or part of a 'tax benefit' that has been obtained by a taxpayer in connection with a scheme to which Part IVA applies.

Part IVA will only apply to a scheme in connection with which the taxpayer has obtained a tax benefit if it would be concluded that a person who entered into or carried out the scheme did so for the purpose of enabling the taxpayer to obtain the tax benefit.

The ATO ruling sets out a number of examples of wash sale arrangements but unfortunately, the examples provided do not include the transfer of an asset by an individual to a superannuation fund by way of in-specie contribution.

Whether Part IVA would apply to this strategy will depend on the dominant purpose test, which will depend on the particular facts at hand. In the opinion of the TechConnect Team, the dominant purpose of any superannuation contribution is for the provision of future retirement and/or death benefits to the member and/or the member’s dependants.

Preservation & Contribution Caps

Remember that any shares transferred via in-specie into superannuation will be preserved until a condition of release is met. Ensure your clients are aware of this before recommending an in-specie transfer of shares into superannuation.

The dollar value of an in-specie transfer must be clearly known and care taken to ensure the transfer will not result in clients breaching contribution caps which could result in excess contributions tax of up to 46.5%.

Please note fees and charges apply to using the Direct Shares option on Pursuit so you will need to consider this when assessing an in-specie transfer of shares.

Summary

There are numerous benefits of making in-specie contributions of direct shares into superannuation. The current environment would appear to be a particularly good time to consider this strategy as the ongoing tax, Centrelink and administration benefits are complimented in many cases by lower share prices resulting in minimal CGT consequences.

The introduction of direct shares onto the Pursuit Select platform provides a great opportunity to look at this strategy for your clients now.

In next month’s edition of @dviser magazine we will look at the process of how you can in-specie transfer shares into Pursuit Select.

This newsletter has been prepared and issued by IOOF Investment Management Limited, ABN 53 006 695 021, AFS Licence No. 230524, RSE Licence No. L0000406 (IOOF) as Trustee of the IOOF superannuation funds and as service operator of IOOF Investor Directed Portfolio Services. IOOF is a company in the IOOF Group of companies comprising IOOF Holdings Ltd and its related bodies corporate. This newsletter is intended for financial adviser use only. It contains factual information and general financial product advice only and has been prepared without taking into account your or your client’s individual objectives, financial situation and needs. The information in this newsletter is not intended to be a substitute for professional financial product advice and you and your clients should determine its appropriateness having regard to your or your client’s particular circumstances. The product disclosure statement or offer document should be obtained before deciding whether to acquire, dispose of, or to continue to hold, an investment in an IOOF product.

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